The Coming Rise of Sears Hometown and Outlets


Since its IPO in the latter half of 2012, Sears Hometown and Outlets has quietly made gains on the markets while the majority of analysts and investors have taken little notice. That will change soon as some high-profile smart money is pouring into the stock and the latest earnings report is on deck for release next week. While the company may suffer from the still-tarnished Sears name, the reality is that Sears Hometown and Outlets is a thriving business with some very appealing financial metrics. Here's what you need to know about the company going into next week's earnings.

I've written about this company a few times, as it has been and remains my top retail pick. In contrast to the underperforming parent company, Sears Holdings , Sears Hometown and Outlets has an attractive, franchise-oriented business. For the hardware business, which is the most difficult of the three because of pricing pressure, management has found success in the franchise model, which helps top-line margins and gives the feel of a neighborhood, independently owned business.

The outlet stores sell closeout and clearance-level major brand appliances. On a macro level, this segment has continued to grow, and will continue to do so, along with the U.S. housing recovery, which has drifted into Mexico and Canada as well. The company has a fantastic supplier relationship (courtesy of Sears Holdings -- still the largest appliance seller in the world) that includes the ability to send back unsalable (damaged, defective, and so on) items at cost.

For a more in depth run-through of the business, read here and here.

Why it's heading higher now
At the recent Value Investing Congress in Las Vegas, Whitney Tilson came out in strong support of the company, which is now his fund's 11th largest position. Tilson believes that Sears Hometown and Outlets is a vehicle for Sears Holdings CEO Eddie Lampert to transfer the high-performing assets of the latter into a tighter, less-bloated organization.

Store count could as much as double to 3,000 , leaving plenty of runway for growth and, more appealingly to value investors, royalties from franchised stores.

In the last quarter, same-store sales came in weaker than expected and caused a double-digit percentage drop in stock price. But investors need to realize that beyond the short-term fluctuations in the business, Sears Hometown and Outlets looks like a phenomenal long-term pick. As I see it, any short-term price dip should be treated as a buy opportunity.

Will this coming week's earnings report blow it out of the water or anger analysts and investors? We won't know until we know; however, I wouldn't be surprised if the company exceeds expectations. If so, watch as the company gets more coverage, money pours in, and the attractive valuation disappears.

This may be the last chance for some time to get in on the value-priced Sears Hometown and Outlets.

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